Grand Rapids Pundit

Housing and Taxes

The City of Grand Rapids and several surrounding areas are considering tax increases this May to shore up local budgets. Of course, much of the reason is the Great Recession we are currently in. Much of the problem is that city governments outspent themselves and sold taxpayers down the road by promising unionized municipal workers very generous and unsustainable pension benefits. We’ll address that issue soon because we are doing research on the coming budget armageddon in Grand Rapids due to the pension ponzi scheme problem. However, another piece of the puzzle is the decline in housing prices, which also leads to lower city government revenues.

We’re hearing bleats from the likes of the National Association of Realtors that housing may be turning around and that prices are up. Prices may have ticked up slightly in some areas. This is due to a few government and bank policies that are distorting the market – temporarily.

First, The Federal Reserve has printed nearly $1.25 trillion of counterfeit money to buy Mortgage Backed Securities from Freddie Mac and Fannie May. This has had the affect of creating a market for mortgages that wouldn’t have been there otherwise. This has kept rates low and loans easier to get. This program ends in March.

Second, we all know about the $8,000 first time homebuyer tax credit that was set to expire last year and was extended to April of this year. This also bumped up demand and prices, but at the expense of future demand and prices.

Third, banks and the government mortgage entities tried foreclosure moratoria to give borrowers time to catch up and work out loan modifications. This has been a failure and foreclosures are picking up again.

Some suggested reading material to learn more about these market-distorting policies:

• The Housing Double Dip Began In December
• Foreclosures down in January, but surge on way?
• Rising FHA default rate foreshadows a crush of foreclosures

According to Trulia, if you bought a house in Grand Rapids in 2005, the value of your house has dropped 25% or more. Anecdotal looks at housing in my personal experience shows a 30-40% decline.

The point is that the decline is not ending and more pain is to come. Foreclosures are increasing and more and more people are realizing that paying on a mortgage for a house that will take decades to regain its value is a waste of time, money, and worry. As I previously posted, the option of walking away from your mortgage is rapidly becoming more and more attractive. This is a good thing. Why? Because it clears the market more quickly and gets us to where we need to be (and will eventually end up anyways) in order to begin rebuilding the economy. The government has wasted, literally, trillions of dollars to prevent the inevitable.

Banks are trying very hard to make people believe that walking away from your mortgage is somehow immoral or shirking your responsibility. Yet banks and businesses walk away from mortgages all the time, because it’s simply an economic decision.

See the article Double standard in mortgage walkaway:

NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business.

Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat.

Those two borrowers face the same financial dilemma: Their mortgages far exceed the values of their properties. Yet one gets to walk away without guilt, while the other can’t.

Gilson is too scared to dump the mortgage on his mobile home. He owes $31,973, but the home is only worth about $14,000.

“I have 12 years of money put into this property that I will never get out,” said the 50-year-old Gilson, from Rapid City, S.D. “But I am still paying because this is what I have been told to do. That’s what I think is right.”

Until now, the focus of the real estate crisis has been on individuals. One in four U.S. homeowners, or nearly 11 million Americans, are underwater on their mortgages. In some parts of the country — Florida, Nevada, Michigan, California and Arizona — the share tops 40 percent.

Some experts say it makes sense for some people to walk away if they’re deeply underwater, even if doing so could wreck their credit score for seven years. It may not be worth it to keep paying a mortgage when they can find comparable rental housing for considerably less money.

The argument against walkaways is that they will wreak economic havoc if a lot of people do it. Banks will have more bad loans on their books. They’ll make fewer loans. Home prices will plunge more.

The rules are different, though, for the walkaway of all walkaways.

That title is reserved for what happened to one of New York’s trophy properties, the 56-building Stuyvesant Town and Peter Cooper Village complex. Spanning 80 acres on Manhattan’s east side, it’s the largest single-owned residential area in the city. Its red brick buildings, built by Metropolitan Life in the 1940s for World War II veterans, are still a haven for the city’s middle class.

Commercial real-estate firm Tishman and its partner, investment firm BlackRock, paid $5.4 billion to buy the property from MetLife in late 2006 — right at the market’s peak. They hoped to make money by converting rent-regulated apartments into luxury condos and raising rents.

Then the housing crash hit. The value now: $1.8 billion.

And you thought you overpaid for your house.

I suggest you read the entire article.

Just look at it this way – if it’s significantly cheaper than your mortgage payment to rent a property similar to your current home, you’re underwater and losing money each month.

Of course, if you decide that fixing your family’s balance sheet is more important than propping up a bank, you should consult an attorney who specializes in foreclosure and short sales. Every state is different in terms of its real estate law, so you must get good advice before making the decision.

More on the local impact, and reaction, coming soon…

Posted by: GRPundit on Friday, 12th Feb, 2010

Fiscal Armageddon – Time for Tough Choices

The October revenue report for the state of Michigan has been released, and there’s very little good news to be had. Revenues were again below the most recent projections. October saw tax collections that were $31 million below expectations. The best real-time indicators of economic activity, sales taxes and income tax withholding, are both down, again.

Due to the near-complete collapse of state revenues, the cuts have (finally) been forthcoming. Public schools received per-pupil cuts of approximately $300 for the current fiscal year. State agencies have been ordered by the governor to cut 10% of their budgets. The cycle of layoffs and reduced revenues continues.

The result? Governor Granholm and the MEA have begun hyperventilating. This week they staged a massive lobbying effort to get legislators to increase taxes. Apparently they don’t require Economics 101 in teacher colleges.

On the city level, Grand Rapids has seen a similar decline in income tax revenues and property tax revenues will probably see declines due to historic drops in resale values of homes and commercial property. Immediately upon announcing the layoffs of 125 city employees, Mayor Heartwell called for a ballot question to raise taxes in the city. He claims there hasn’t been a tax increase in 15 years. Apparently the constant reduction of the personal income tax exemption, the added property tax bill “service fee,” and the increase in trash collection property tax don’t count as tax increases in the mayor’s book.

Oh, and don’t forget that The Rapid is coming back, probably in early 2010 to ask, again, for a tax increase to build the redundant and wasteful “Silver Line” bus service, to clog up Division during rush hour.

But the fiscal problems are just beginning, and there is very little sign that anyone is proposing real solutions. The “easy” way out, increasing taxes, will only work so much. They will run in to the law of diminishing returns. The speaker of the state house, Democrat Andy Dillon, apparently grew some huevos and bucked his MEA masters by proposing the pooling of all public school health plans into one statewide health plan. The MEA, fearing the loss of their money-laundering cash cow health plan MESSA, promptly went ape-sh*t. This illustrates the difficulty of real, substantive change at the state level. So many special interests peddling their influence (in the form of money) makes it nearly impossible to propose an innovative solution to the state’s structural budget problems.

Of course, then there are the unsustainable defined-benefit Ponzi public pension plans. They will fail. It’s just a matter of time. Even politicians can’t repeal the laws of compounding numbers. But I’m sure they will try.

But we should turn to the local level, where real people can have the most chance of affecting change. We can, as a city, choose to continue down the ultimately disastrous path of “the easy way out,” or we can have real, substantive change in how city government does business.

A quick overview of what’s going on at the local level: As state revenue declines, so does the state subsidy to cities called revenue sharing. Revenue sharing has been on the decline for several years. City leaders keep pointing to how much has been “lost,” but their complaints fall on deaf ears – or at least ears that understand that cities fall further back in line from other special interest groups.

As revenue sharing declines, so have city income tax receipts. The city’s income tax revenue is down 14% (apparently year on year).

Not only has revenue been on the decline, the gigantic hydrogen bomb of the city’s pension system is preparing to detonate. The city’s 2010 fiscal plan (published before the layoffs were announced this week), is available here. One paragraph should stand out and set off all the alarm bells in the city:

In FY2007 our two pension retirement trusts were 110% and 120% funded.  Both employer and employee contribution levels were at or near the lowest possible levels.  This advantage was eliminated by the breathtaking decline of the financial markets over the past 18 months.  We now know that our retirement funds are significantly underfunded. This means that both employee and employer contributions must move dramatically higher.  Proposed changes to actuarial assumptions and plan provisions will freeze employee contributions at the bottom of the contribution range and provide additional time for the City to adjust to higher employer contributions.  Nonetheless, the employer share will go from 7.7% in to 9.29% in FY2010, and 13.62% in FY2011 for the General Pension and from an FY2010 rate of 0% to an estimated 23% in FY2011 for the Police/Fire Pension.  These percentages assume that we will be able to implement critical smoothing techniques that will mitigate the intense upward pressure on required contributions. The increase in employer funding requirements contributed to the FY2010 GOF operating deficit of $2.9 million.  Unless we see a significant increase in the market value of retirement plan assets over the next couple of years, the estimated pension contribution will continue to rise. (emphasis mine)

Translation: 2010 layoffs are just the beginning. Fiscal Year 2010 includes a pension contribution (as a percentage of salaries) for the police and fire employees of 0%. Yes, 0%. This will go from 0% to 23% (of salaries) in one year. A search of the fiscal plan shows that total personnel costs for police and fire are about $67 million. Let’s back out about 40% of that (just a wild guess) to come to actual base salary cost. We come up with about $40 million. Now,  re-read the above paragraph. The city is going from contributing $0 in the current fiscal year to the police and fire pension plan to (my estimate) of 23% of salaries in 2011 – or about $10 million. The increase in contributions for the other defined-benefit pension participants on the city’s payroll will increase from 9.29% this year to 13.62% next year. This is unsustainable.

The mayor’s solution? Raise taxes.

Lest I be declared someone who only points out problems and no solutions, here are a few suggestions:

1. Lay off all non-essential employees. This includes the “equal opportunity” department of five people.
2. Outsource information technology (IT) services.
3. Eliminate the Office of Children, Youth, and Families.
4. Convert all employees, now, to a defined-contribution retirement plan. NOW.
5. Eliminate the Downtown Development Authority. This entity sucks up about $17 million of local property tax revenue that would normally go to the city’s general operating fund. The DDA also currently owns the Van Andel Arena. Sell the arena, pay off the outstanding bonds, and use the excess to pay off some of the DeVos Place bonds. The DDA currently operates as a taxpayer-funded subsidy to developers, giving away free money to those who ask.
6. Implement a fire department response fee. Most (if not all) homeowners insurance plans offer coverage if you’re charged for fire department response.
7. Eliminate the city’s trash collection services. There is a special property tax levied for this. There are plenty of private trash haulers. Once the trash collection services are eliminated, go to voters and ask them if it’s ok to convert the current trash levy on property tax to a general fund levy so that it can be spent on other city services (including police).
8. Contact every citizen and ask them what their priorities are. Do you prefer Police and smooth roads, or do you prefer an equal opportunity department and subsidies for developers?

If serious, dramatic changes are not implemented, the city will go bankrupt. This has started to happen in other states. There is no chance in h*ll that the economy is going to return to anywhere near where it was at the peak of the last cycle in 2007 – at least not any time soon.

Tough choices need to be made now – if our politicians can stomach it.

Posted by: GRPundit on Friday, 13th Nov, 2009

“Stimulus” FAIL

Just keep this chart in mind when they come back, in the near future, for debtslaveryus stimulus 2.0. Remember – the politicians are lying to you.

Stimulus Fail

Posted by: GRPundit on Friday, 6th Nov, 2009

Walk Away from that Mortgage

Now that the Federal Reserve-stimulated asset bubble has burst in the housing markets, and the subsequent follow-on government attempts to fix a government-created economic crisis are failing (see cash for clunkers and the market-distorting “first time homebuyer credit”), it’s time to assess your current situation and decide whether or not to walk away from your mortgage.

The government, by changing the rules and allowing the “too big to fail” banks and their executives to escape the consequences of their actions, and ultimately causing the “too big to fail” banks to get bigger, has set the stage for the ultimate moral hazard. What does that mean? By changing the rules and bailing out the multi-million dollar bonus executives, they have shown us that the rules don’t apply across the board. If your gigantic “systemically important” corporation gives enough money to Barney Frank and the rest of Congress, you get your bonus even if you’ve succeeded in destroying your company.

This means that those of us on main street, who were caught up in the Federal Reserve’s asset bubble creation (aka, the housing bubble), are stuck holding the bag while the politicians and the bank CEOs laugh all the way to the bank – literally.

The housing market in Michigan won’t get back to it’s pre-housing bubble days until at least 2023, according to estimates. This means that chances are pretty high that your house is worth far less than you owe, assuming you got a mortgage in the last ten years (and didn’t cash out with a home equity loan). In fact, chances are your house is worth 30%+ less than it was just three years ago.

The solution? Walk away from your mortgage. There’s a handy calculator that will tell you if it is worth it to walk away. You can try out the calculator here.

I can hear it already. Moral obligation, doing the right thing, living up to promises, etc. Yes, you might have been right five years ago. Now, the rules changed in favor of the oligarchy. That means that all bets are off. We, the taxpayers, are stuck with an exponentially-growing national debt. The federal government continues to take on bad debt from the private sector. We get saddled with bad debt; the bank get to keep their bonuses and get even bigger.

The housing market isn’t coming back any time soon. In fact, it’s going to continue to get worse as we are hit with a deflationary depression. Japan did exactly what the US government is doing now. They’ve been stuck in a deflationary spiral for over ten years.

Fix your family budget. You alone will look out for yourself. Don’t expect the politicians or CEOs to do anything that’s in your best interest.

1. Consider walking away from your mortgage. It’s suddenly in vogue to rent again. You can rent a house nicer and bigger than the one you have for less money.
2. Move all of your checking/savings/investment accounts away from the big national banks. Find a local credit union. Credit unions didn’t participate in the housing bubble run up. They don’t screw over their customers with outrageous fees. They are non-profit institutions that return profits back to members.
3. Pay off unsecured credit card debt as fast as you can. Cut up the cards. Pay for everything else with cash (or your credit union debit card).
4. Stockpile CASH. In a deflationary spiral, cash is king. Instead of (government-created)  inflation eating away at the value of your money, deflation increases the value of your cash.
5. If you lose your job, stop paying on debt immediately. Build up savings, if you can. Only worry about feeding your family and keeping a roof over your heads. Foreclosure can take more than a year as the banks are overwhelmed.

This isn’t capitalism any more folks. This is oligarchy.

WARNING: If you are considering walking away from your mortgage, it is extremely important that you work with an attorney experienced in foreclosure and short sales.

Update: See my latest post on this issue: Housing and Taxes.

Posted by: GRPundit on Thursday, 24th Sep, 2009

Change We Can Believe In

This week, President Obama re-appointed Ben Bernanke as chairman of the Federal Reserve. Bernanke declares that he “saved the world.”

This is a bit like the arsonist firefighter declaring that, after he set fire to your house, he then “saved” it from the fire. Right.

He lied then. He’s lying now.

Change we can believe in.

Posted by: GRPundit on Friday, 28th Aug, 2009

The Government is Lying to You

Forget the artificial creation of the dual-party system. It’s a scam. They’re all lying.

Posted by: GRPundit on Wednesday, 12th Aug, 2009

Michigan Tax Revenue Continues to Deteriorate

The latest monthly state revenue report was finally released today, and it doesn’t look good. A few of the money quotes:

The revenue collected from Michigan’s General Fund and School Aid Fund earmarked taxes totaled $1.3 billion in May, which was down 13.4% from last year’s level.  This marked the  fourth consecutive month  that tax collections have declined in excess of 10.0%.  While  collections for almost all of the major taxes experienced declines in May from their year-ago levels, the most significant declines were experienced by the sales, use, and income taxes.   Compared with the Senate Fiscal Agency’s monthly breakdown of the revised consensus estimates for FY 2008-09, May collections fell below the monthly estimate by $62.0 million and this shortfall was due primarily to weaker-than-expected sales and use tax collections.

When the Senate Fiscal Agency met in mid-May, they estimated the revenues for the remainder of the fiscal year. Despite the fact that they updated their estimates at that time, actual revenues for May declined by $62 million. In other words, in the matter of a few weeks, their estimates were already off. The budget is deteriorating that quickly.

More:

Sales tax revenue totaled $406.6 million in May, which was down a sharp 22.2% from the year-ago  level.   A consistent historical monthly series for the sales tax is available back to FY 1984-85 and the decline in May marks the largest percentage decline  in monthly sales tax collections during this 24-year period.

. . .

Tobacco tax revenue totaled $84.0 million in May, which was down 5.9% from last year’s level.  Most of  this decline is likely due to the large increase in the Federal tobacco tax that went into effect on April 1.  The Federal tax increase is having a negative impact on Michigan’s $2-per-pack cigarette tax because it boosted the price of cigarettes and therefore is having a negative impact on cigarette sales and Michigan’s tax receipts.

That last quote is vitally important. It perfectly exemplifies the power of taxation. It’s common sense, but the politicians in Lansing don’t seem to get it. The more you tax something, the less of that “something” you’re going to get. Clearly, the more cigarettes are taxed, the fewer cigarettes that will be sold. The same goes for businesses. The more you tax businesses, the fewer businesses there will be, and hence the fewer jobs there will be. Gosh, it’s pretty simple, but our tax-hiking pals in Lansing and elsewhere don’t seem to get it.

Finally, the $406 million of sales tax revenue in May was the lowest monthly level of sales tax collection I could find, going back at least until 2005. Michigan is hurting, folks, and it’s only going to get worse, as exemplified by the state’s skyrocketing 14.1% unemployment rate.

Read a little about how California’s government is collapsing because of that state’s inability to enact any rational level of reform: California Collapsing.

Posted by: GRPundit on Monday, 22nd Jun, 2009

Wanda Sykes on the Bailouts

Change we can believe in? Last night’s press conference by President Obama was hardly a departure from the typical George Bush-style fear-mongering. You can sum his speech up like this: “Pass the stimulus, or else the universe will collapse!!! Gravity will fail! The sun will implode! Think of the CHILDREN!!”

Sometimes the best way to get real the message across is through comedy. It’s so much fun to expose the absolute idiocy of politicians:

Posted by: GRPundit on Tuesday, 10th Feb, 2009

The Real National Debt

The REAL natinal debt – including all unfunded future mandates. The math just doesn’t work. Yes, it currently says $58 trillion.

Margaret Thatcher: “The trouble with Socialism is, sooner or later you run out of other people’s money.”

Posted by: GRPundit on Sunday, 1st Feb, 2009

Frightening Charts of the Day

I just wanted to quickly share a few telling charts regarding what is happening with the US economy over the last year, and especially over the last few months.

First is the number of new home sales. 

New Home Sales - Holy Crap!

Second is retail sales:

Retail Sales

Finally, to see what a bubble really looks like, check out the Case-Schiller home price index, indicating the rise and decline of average home prices:

Average Home Prices - Your Federal Reserve at Work!

All these graphics come from one of my favorite blogs: Calculated Risk.

Posted by: GRPundit on Saturday, 31st Jan, 2009